Regular fluctuations in currency market (both currency appreciation and depreciation of currency) is a matter of routine. However one has to express his concerns regarding recent sharp decline of rupee. There are certainly some positive aspects of this depreciation but they do not seem to exist visibly. However whole economy has been griped due to its dire consequences and the common man is the visible sufferer. Why has rupee gone down so sharply against dollar? it is a separate debate, which can be discussed on some other occasion.

Right now there is one question, which is hovering around everyone’s head, is that what would be its disastrous consequences and how could they be controlled. Even though the main cause of rupee depreciation is purchase of $125 million by State Bank of Pakistan from interbank market, which has led to eventual shortage of dollars in currency market and its value rose sharply. However at the same time, there are other reasons as well.

According to a cautious estimate every 100-paisa decline in rupee results in an increase of Rs 1 billion in our international debt burden so one can easily gauge the magnitude of increased international debt burden as a result of 7 percent to 8 percent decrease in value of rupee. We have been under immense pressure of foreign as well as local debt and any decrease in value of rupee would only add to its intensity. Depreciation of currency results in making imports expensive and exports economical. We have always been the victims of trade deficit due to excessive imports than exports. Most of our imports are basic necessities of life, which are to be bought even if they experience rise in their prices, which has an inevitable effect of raising import bill. Purchase of furnace oil, edible oil, raw material and machinery for industry would become more expensive to add to costs of production. Automobile companies have already increased prices of their products as their imported raw material and parts have become more expensive. The most visible impact has occurred due to expensive petrol, furnace oil and diesel, which has made the government to increase petroleum prices in last two months consecutively and there are no good news ahead to be shared. Even though this month prime minister has rejected the summary of increased prices keeping in view the sufferings of common man after significant increase in electricity prices and for that government would need to give a hefty subsidy to overburden national exchequer which is already under immense pressure. Due to increased petroleum prices for some time , there has been the tendency of increase in prices of all the finished products as petroleum products are used in production and distribution of all goods. Since our main reliance is on thermal power as far as electricity production is concerned and it uses furnace oil for its production so increase in electricity prices can be well imagined and quite expected. Proposed reduction in subsidy by the government and sharp increase in cost of production simultaneously is nothing less than the nightmare for the people. Right now people cannot hope for anything, which could spare them from the influx of price rise. Investors’ confidence has been shattered sharply due to this depreciation and they keep on accumulating dollars to expect higher return on their return investment. These speculations might lead to further decline in rupee value. Even though depreciation of currency is one of the prescribed tools to reverse the trend of traded deficit and some countries such as Japan deliberately devalue their currency to get the desired results. However in Pakistan it always backfires, as we have to face losses whenever our currency loses its value and it adds to our deficit. In simple words it occurs due to our increased import bill and reduced export revenue.

Import of oil constitutes our main imports and it is to be bought (due to its inelastic nature) even if its price rises due to depreciation, which adds to the import bill. On the other hand our exports, which become economical do not increase with the desired proportion so export revenue goes down due to decline in their prices. Consequently trade deficit increases rather than decreasing. Poor law and order conditions, electricity and gas load shedding and increased cost of production make it difficult to achieve the desired increased target of exports. However some exporters along with currency dealers have definitely capitalised in this situation but the whole nation is suffering really badly out of it. Proactive role of the government and economic managers and State Bank seems to be nothing in this regard which is badly needed at the moment. It appears they are groping with this issue and are in the state of confusion, which is evident due to their lackluster response. Some people associate this indifferent approach with government /IMF agreement which has actually barred the central bank from intervening in the currency market. Even though State Bank initiated its inconclusive enquiry against some banks and currency dealers there is no clear-cut result out if it. Since average income of Pakistani is very less and more than half of our population is living below the poverty line therefore such increase in prices of basic necessities is very burdensome for them with relatively lesser impact on rich people. It is hoped more proactive steps would be taken soon to arrest the trend of further decline in the rupee so as to control the inflation and its negative consequences, which are gripping the whole nation at the moment.

The writer is a senior educationist and author Accounting, Economics and Business Studies,Email: sirabdulwaris@yahoo.com

Courtesy: Dailytimes.com.pk

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2 thoughts on “Implications of falling value of Pak rupee vs. dollar”

yet the bhutto is still alive and sharif says he is innocent, Mqm feel its also innocent and they all want more after ruling for decades and after taking billions of loans that apparently went to panama, london lfats or surrey palace. Its a sad and dark situation for people of Pakistan, where illeterate (kept by design) people vote for 1 broast or 1 plate of biryani (proofs can be seen on youtube where people fight for food like animals) SIGH!